Life goals?: Liquidity, Lifestyle, Legacy
Please note: The article does not constitute advice or any form of recommendation. Barclays Private Bank does not offer tax advice, and professional advice should always be sought.
When there are large sums of wealth at stake, the need for forward planning increases. Among other things, it can give you peace of mind during your lifetime. It can also help avoid leaving your estate – and how it passes down to loved ones – unnecessarily exposed.
In this article, we’re going to explore the three Ls – liquidity, lifestyle and legacy. Focussing on these three ‘buckets’ can sharpen the mind when thinking about how to use wealth in the most meaningful ways for you. Especially when short-term conditions might be unpredictable and all encompassing.
Before we start, it’s worth emphasising that there is no one-size-fits-all approach with this informal philosophy. While one person might love the idea of leaving a legacy sum behind, someone else might relish the opportunity to spend every last penny they own! The point being that there are different ways (depending on personal preferences) to allocate across the three buckets, as well as within each bucket.
Wealth planning typically involves very personal decision-making but some common focus – at least at the start – could play a useful role.
How much cash is enough cash? It might feel like an impossible question at first, but it’s a good building block on which to base future planning conversations.
If you were to take into account your fixed costs, such as a mortgage or school fees, how much additional cash would you ideally want to set aside? Some people like the security of having readily accessible funds for a rainy day, while others like to keep their powder dry in case an investment opportunity crops up. Either way, it’s possible to work out an approximate threshold beyond which you think any cash can be categorised as being ‘excessive’.
As Nick Bearne, Director at Barclays Private Bank explains, it’s worth taking a step back and trying to see the bigger picture: “While cash might provide a degree of emotional comfort and security, it’s not without its own risks. You only have to look at today’s environment to see that, because we’ve got inflation rapidly outpacing interest rates. In simple terms, the cost of living is leaving cash hoarders in the slow lane.”
But what are the alternatives if you don’t want to sit on cash? “If you’re looking for long-term growth and wealth preservation, then investing is worth exploring,” says Nick. “Obviously it comes with more risk than locking cash away in a current account, but it’s not a binary decision. You can save a portion of cash, and also deploy a separate portion of cash to investments. Ensuring you find the right structure for these investments is also important because diversification of tax exposure, especially in today’s ever-changing taxation environment, is also a critical discussion. Ultimately, it’s about finding a balance for your needs and aspirations.”
For business owners in particular, there’s additional food for thought: “If you’re selling your business, you typically need to set aside some of the proceeds to pay a tax bill and other lump sum expenditure that is planned,” cautions Nick. “Therefore, it makes sense to factor that in at the beginning of any liquidity planning, to avoid getting caught short further down the line.”
As the adage goes, ‘life is short’, and many people want to strike the balance between prudent financial planning – for the long term and for those worst-case scenarios – and living in the moment with a lifestyle that makes them happy.
Whether you have frequent and exotic travel in mind, or want to fund long-term school fees for your children, mapping out early where you think your lifestyle priorities might lie, could be a worthwhile exercise.
As George Hill, an Assistant Vice President at Barclays Private Bank explains, a small amount of early planning can go a long way: “We know how fun spontaneous purchases can be, and we’re not saying those should never happen. But we’re also aware that a lifetime of spontaneous spending is unsustainable for most people.”
“This is especially true given that most of us are now living for longer, which means our wealth needs to last for longer. Ask yourself some simple questions, such as – What do I like spending money on? And will my spending increase or decrease as I get older? Once you’ve covered those things off, it’s typically easier to envisage your preferred lifestyle, and the means of funding it.”
It’s not just your own lifestyle that’s worth thinking about. If you’ve got dependents, whether family or employees, there’s value in having a so-called ‘Plan B’ in the event a worst-case scenario plays out. It’s something you can read about in our recent article, Do you have enough financial protection?
Unfortunately, the cold reality is that we all die at some stage, and for some people the chance to leave a legacy is one they proactively like to plan for.
“The motivation for doing this is deeply personal,” says Nick. “As an example, many successful business owners like the idea of ‘sending the lift back down’. They’re keen to help someone else in their early shoes, or there might be a particular cause close to their heart.”
Motivation aside, the practicalities of posthumous giving are nuanced and varied. And from an estate planning perspective, there are some high-level implications worth being aware of. “Charitable donations made via a will in the UK, can potentially help reduce the inheritance tax rate on your estate,” reflects George. “Before you get to that stage, however, you might be pondering gifting while you’re still alive. That’s when we’ll typically start considering the seven-year window that people currently have before a gift is exempt from inheritance tax. The key point with legacy goals is that good intentions are often better acted on when there’s structure and clarity behind them.”
As we alluded to at the beginning of the article, not everyone will want to leave a legacy and it might be that they prefer to align their wealth against only two of the three buckets – lifestyle and liquidity.
“Each person is different and their financial planning needs to reflect that,” concludes Nick. “The three buckets are at least an informal guide for aligning your wealth with your unique ambitions.”
Further information about legacy planning can we found in our article, Is gifting all in the timing?
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